|The digital economy has accelerated during the COVID-19 pandemic in many countries and moved from the conventional brick-and-mortar and cash-based models. This has raised concerns about the preparedness of tax regimes and presenting daunting problems and opportunities for tax authorities.
According to the Organization for Co-operation and Economic Development (OECD), 27 countries in Latin America and the Caribbean and 30 countries in Africa have some form of taxation for digital services.
The question of taxing large multinationals that dominate the digital economy has been one of unintended consequences. Although much of these planned tax reforms have been on how they will affect global tech giants such as Amazon, Facebook, and Google, they will also change or impact even small, medium sized, large, and multi-lateral businesses.
There has always been an issue of large multinationals avoiding taxes by shifting profits between countries. Corporate tax avoidance costs countries anywhere from $100 billion to $240 billion annually.
Google, for instance, moved $22.7 billion through a Dutch shell company to Bermuda in 2017; Facebook paid just $9.6 million in corporation tax in the United Kingdom on £1.3 billion of revenue. Multinationals use “transfer pricing” to do this legally. How does this procedure works? The company set the transaction prices among its subsidiaries to guarantee that profits are registered in low-tax countries rather than where the economic activity generated the profits occurred.
Hence, the OECD released a framework proposal to de-escalate this. 136 countries have signed a deal to ensure companies pay a global minimum tax rate of 15% – they account for over 90% of the world economy. The OECD, which has steered the negotiations, estimates the minimum tax will generate $150 billion and encourage multinationals to repatriate capital to their country of headquarters, giving a boost, especially to poor or developing economies. The agreement is set to take effect by 2023.
Due to the digital economy’s growth, many countries in Latam have mandated the collection of VAT (value added tax) on direct supplies of digital products and services such as website designing, hosting, auctions, e-learning, gig and sharing economy, media, and software.
The result has increased tax revenues and tax compliance on digital platforms. In addition, on June 1, 2020, Mexico enacted a 16% VAT on foreign business-supplied digital services, which are required to register for VAT and remit taxes monthly.
On the same day, Chile imposed a 19% VAT on digital services provided by foreign businesses. Ecuador also enacted its 12% VAT on all digital services in September 2020. This required non-resident digital services providers to register with the Ecuadorian tax authority. Mexico, which started taxing digital services in mid-2020, increased its tax revenues by $304 million – a whopping 915% jump compared with 2019. Meanwhile, Chile secured $194 million in VAT revenue from digital services between June 2020-21. Ecuador was expected to collect more than $19 million in 2021.
Introducing such a new tax regime has generated additional funding for various governments in Latam that can be used for better governance, provide stability and certainty.
African countries are no exception. They have devised digital tax policies to levy direct and indirect taxes on digital transactions. Nigeria, Kenya, Zimbabwe, and Tunisia introduced new direct digital service taxes (DSTs). Others, such as Cameroon, Algeria, Morocco, Kenya, and South Africa, have broadened existing indirect taxes to reach the untapped revenue in the digital economy.
In January 2019, Zimbabwe enacted its Direct Digital Services Taxes – any amount received or accrued above US$500,000 by broadcasting or e-commerce services is liable for 5% tax. Egypt announced budget draft to introduce digital taxes to increase revenue from the digital economy.
Meanwhile, in January 2020, Tunisia imposed a 3% digital service tax and a 15% withholding tax on payments made to providers of advertising services or in return for the supply of such services through digital means. Kenya imposed a 1.5% tax on income through a digital marketplace on November 7, 2019.
In 2020, Nigeria enacted a 30% tax was imposed on foreign companies that transmit or receive signals, images, sound, messages, and data by electronic devices. This was in respect of activities such as high-frequency trading, e-commerce, electronic data storage, online payments and adverts, and other participative online network platforms.
To tax or not is a contentious issue with push-back from governments and businesses. But, more so, it’s an essential phase of digital transformation that can have a global impact.
So, what do you think? Is taxing digital services suitable for the government so they can plough back into public welfare but it’s bad for businesses and consumers, adding to the inflationary concerns and impede growth?